A couple of months ago, a new Bitcoin “strain” hit the street — Bitcoin Cash. The product of a technical and philosophical split in the Bitcoin community, the“forking of ways” is a reminder of miners’ importance and their inherent influence on valuations. So, let’s first deconstruct the Core v. Cash issue, and then discuss what the cryptocurrency’s future may hold.
How Does Bitcoin Work?
Before we delve into the Bitcoin Core (“Core”) v. Bitcoin Cash (“Cash”) situation, let’s quickly review five operational and functional points about digital currencies.
- Bitcoin — (and other digital currencies) — are created and managed using blockchain technology, which is both decentralized and exceptionally secure.
- New Bitcoins are created through a process called mining. Think of it this way: back in the day, when prospectors rushed west for gold, they used pans and pikes to salvage nuggets from stream bottoms and rocks. These days, cryptocurrency “miners” use computers to unearth tokens from complex algorithms.
- In the simplest terms, since blockchain databases are decentralized, multiple computers must confirm any given transaction before it’s committed to the public ledger.
- Transaction rates are directly proportional to computer resources: the more transactions, the more computer power is needed.
- To compensate for providing the necessary computational power to keep the system functioning, miners collect transaction fees — and those fees are, in large part, determined by the number of transactions in the queue.
- The “mempool” is the queue of transactions waiting to be processed in the Bitcoin environment.
Bitcoin’s Popularity Is Directly Proportional To Bitcoin Transaction Fees
As you may have already surmised, due to the operational nature of the beast, the more Bitcoin increases in popularity, the higher the transaction fees soar. Now, couple that with something Mark Friedenbach of Blockstream stated, “The mempool will always be full. Get used to it.” So, if the mempool remains in a perpetual state of saturation, and transaction fees are directly related to transaction times, it’s fair to speculate that Core’s fees will continue to rise.
Bitcoin Fork Highlighted Transaction Fee Issues
Since the Core-Cash fork, Core’s transaction fees have been climbing, while the offshoot’s — Cash’s — transaction fees have been lower.
You may be thinking: “Of course Cash’s transaction fees are lower; less people are using it.” Fair enough. But, is that the whole story — or are other market forces at play? Are Core’s infrastructure and operational protocols configured in such a way that will impede growth?
Bitcoin Scalability Solutions: Segwit, Block Size Increases, & Segwit2x
Scalability has been on the Bitcoin radar since the currency’s inception. Satoshi Nakamoto’s — (the elusive creator(s) of Bitcoin’s) — original white paper predicted that increased adoption of the currency would lead to increased mining and solve the scalability problem. Moore’s Law also figured into Nakamoto’s calculations: hashrates would improve over the years because processing chips would be able to handle more data and a quicker rate.
And for the most part, Nakamoto’s hypothesis has held. Processing boards are predictably improving alongside the public’s acceptance of Bitcoin. Still, the mempool is piling up, transaction fees are rising, as are processing times. The latter is of particular concern. Because if Bitcoin is going to truly transition to a widely accepted currency, then transactions times must be near instantaneous. Think about it: McDonalds can’t accept Bitcoin, globally, if Bitcoin transactions take two hours to rectify.
So, to solve the processing problem, Bitcoin luminaries started proposing solutions. The two ideas that rose to the top were 1) SegWit and 2) a block size increase.
SegWit: (Short for “segregated witness”) SegWit is a code processing change that seeks to shrink the size of transaction “packets” (we’re using this term loosely, not technically) by stripping them of signatory data. The “signatures” wouldn’t be eliminated, but instead stored differently. The theory goes that smaller transaction “packets” translates into faster transaction processing times.
Block Size Increase: To solve the sluggish transaction problem, another facet of the Bitcoin community advocated for increasing block capacities from 1MB to 2MB.
SegWit2X: A hybrid of the SegWit and Block Size Increase approaches to unclog the Bitcoin blockchain, SegWit2x is a platform modification plan wherein participating computers “first activate Segregated Witness and then a 2 MB hard fork.”
Bitcoin Core v. Bitcoin Cash
On August 1, 2017, the Bitcoin community split in two. The original Bitcoin became Bitcoin Core; the offshoot adopted the name Bitcoin Cash. For the purposes of this article, suffice it to say that the miners who opted to stay with Core felt it wise to implement SegWit, but not increase the block size.
The main difference between Core and Cash is that Cash has a larger block size capacity — 8MB compared to Core’s 1MB. Moreover, the structure of Core is debatably more suited for investment opportunities; Cash aims to be a more transactional platform. To drive this point home, Cash’s ultimate goal is to be able to process transactions as quickly as, say, Paypal, which can handle up to 2,000 transactions a second. To give you an idea how far Bitcoin has to go, Core is averaging about four to seven transactions per second (arguably on account of the low block size).
Bitcoin Miners: Essential and Powerful
The Core v. Cash fork further shed light on another essential cog in the Bitcoin machine: respected, committed, and engaged miners. They hold a large chunk of the power. Without miners, the Bitcoin blockchain collapses. And in order for any code changes or upgrades to work, the miners must be on board — especially the big block miners.
Predictions: Cash Reaches Core Parity
The core-cash split. Though firm figures are not available at the time of this writing, several “big block” miners abandoned core and moved to cash. As of today, Cash is steadily climbing the cryptocurrency status index, weighing in at a respectable third place with only a short time on the scene.
What does that mean for Core? To be fair and certain, both Cash and Core are currently in flux. A fork of this size needs time to work through kinks. Caveats in place, we think it’s reasonable to speculate that Cash will catch up with Core over the coming months and reach parity.
As discussed, miners are essential to a properly functioning digital monetary system that is able to process transactions in real time. And though 97% of miners reportedly voted to implement the Bitcoin Improvement Proposal 91 (BIP 91), some important big miners weren’t among them.
So, what are the two strains of Bitcoin looking like after the split?
For starters, some of the larger miners immediately moved to Cash because of the larger block size. Moreover, the fork created a situation in which Cash blocks required less resources to mine and build new blocks. Since building new blocks is how miners can earn money, many of them transferred resources to the Cash chain to…well…cash in. And according to an Investopedia article, over the past several days, the Core network has slowed down, thus prompting a rise in transaction prices. If this trend continues, there’s a chance that Cash will not only catch up to Core, but maybe eventually overtake it.
Segwit Flops, Almost No One Uses it More Than a Day After Activation. (2017, August 25). Retrieved October 09, 2017, from http://www.trustnodes.com/2017/08/25/segwit-flops-almost-no-one-uses-day-activation